Equity-options investors are looking to relative value trades between markets as opportunities to profit from dispersion strategies become scarce

Equity-options investors are looking to relative value trades between markets as opportunities to profit from dispersion strategies become scarce

Equity-Options Investors Shift to Relative Value Trades Amid Rising Dispersion

Equity-options investors are increasingly adopting relative value strategies to navigate a market environment marked by elevated dispersion levels, driven by rapid sector rotations and AI-driven stock movements. As dispersion—the variation in returns across stocks—reaches multi-year highs, traders are focusing on index-to-index volatility spreads to capitalize on divergent market dynamics.

The surge in dispersion follows a year of sharp rotations, particularly in technology and AI-linked stocks, which have outperformed broader markets. This has prompted investors to seek opportunities in relative volatility trades, such as betting on the S&P 500 versus software indices or gold. For example, JPMorgan strategists recommend selling volatility on software stocks while buying it on the S&P 500 to exploit current dislocations. Cross-regional spreads, such as U.S. versus European or Asian indices, are also gaining traction, though timing risks remain a challenge.

BNP Paribas QIS Lab's recent research highlights three dispersion-trading approaches tailored to market cycles: gamma-flat strategies for low-volatility environments, vega-flat strategies for volatility risk, and theta-flat strategies for bull markets. These frameworks emphasize systematic hedging and basket construction to manage risk while capturing the dispersion premium. The report notes that gamma-flat strategies have historically offered defensive benefits during periods of uncertainty.

Despite growing interest, structural challenges persist. Post-pandemic shifts in structured product issuance have altered volatility dynamics, with U.S. markets now dominating flows that previously favored Asia. Additionally, geopolitical events can create "gap risks" in cross-region trades, as seen in April 2026.

Investors remain cautious, with many prioritizing tactical allocations to dispersion strategies based on macroeconomic cycles. As Societe Generale strategists note, "current entry levels demand precision in dispersion baskets," reflecting a shift toward more selective, data-driven approaches. With volatility spreads at extreme levels, the market's ability to sustain these strategies will depend on maintaining synchronized timing and adapting to evolving flow dynamics.

According to Bloomberg: Bloomberg, Option Pros Trade Index Versus Index to Play Huge Stock Rotation (Feb. 22, 2026).
BNP Paribas QIS Lab: Equity Dispersion: How, What and When to Trade (2026).